Finance (No.2) Bill

House of Commons

Session 2005 - 06
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Finance (No.2) Bill

Finance (No.2) Bill
Schedule 6 — Avoidance involving financial arrangements
188

      (6)
The amendments made by sub-paragraphs (2) and (3) have effect in relation
to accounting periods ending on or after 22nd March 2006.
      (7)
The other amendments made by this paragraph have effect in relation to
shares held by a company on or after 22nd March 2006.
      (8)
But, in relation to an accounting period beginning before 22nd March 2006,
5
amounts are to be brought into account for the purposes of Chapter 2 of Part
4 of FA 1996 as a result of those other amendments only if the amounts relate
to any time on or after that date.
Shares treated as loan relationships: application of rules to non-qualifying shares
8     (1)
Section 91B of FA 1996 (non-qualifying shares) is amended as follows.
10
      (2)
In subsection (1) (conditions for section to apply)—
(a)
in the opening words, for “a company if at any time in an accounting
period” substitute “the times in a company’s accounting period
during which”, and
(b)
in the words after paragraph (c), for “at no time in the accounting
15
period does section 91A above apply” substitute “, during those
times, section 91A above does not apply”.
      (3)
In subsection (2) (how Chapter has effect for the accounting period) after “as
if” insert “during those times”.
      (4)
The amendments made by this paragraph have effect in relation to
20
accounting periods ending on or after 22nd March 2006.
      (5)
But, in relation to an accounting period beginning before 22nd March 2006,
amounts are to be brought into account for the purposes of Chapter 2 of Part
4 of FA 1996 as a result of those amendments only if the amounts relate to
any time on or after that date.
25
Shares treated as loan relationships: redeemable shares
9     (1)
Section 91D of FA 1996 (condition 2 for section 91B(6)(b)) is amended as
follows.
      (2)
For subsection (2) (cases in which share regarded as redeemable)
substitute—
30
“(2)
For the purposes of this section, a share is to be regarded as
redeemable if (and only if)—
(a)
it is redeemable as a result of its terms of issue (or any
collateral arrangements) requiring redemption, entitling the
holder to require redemption or entitling the issuer to
35
redeem, or
(b)
there are arrangements which will or might entitle the
investing company to qualifying redemption amounts.”.
      (3)
After that subsection insert—
“(2A)
For the purposes of subsection (2) above—
40
“arrangements” includes any agreement or understanding
(whether or not legally enforceable and whether or not
forming part of the terms of issue of the share), and

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Schedule 6 — Avoidance involving financial arrangements
189

“qualifying redemption amounts” means amounts which, when
taken together, are the same, or are substantially the same, as
an amount that might be payable on the redemption of the
share.”.
      (4)
In subsection (7) (shares mirroring a public issue: Case 1), in paragraph (b)
5
(associated companies issuing mirroring shares to company within 24 hours
of its issuing shares), for “24 hours” substitute “7 days”.
      (5)
In subsection (8) (shares mirroring a public issue: Case 2), in paragraph (a)
(second-level mirroring shares issued within 24 hours of the public issue),
for “24 hours” substitute “7 days”.
10
      (6)
The amendments made by sub-paragraphs (2) and (3) have effect in relation
to any share held by a company on or after 12th May 2006 in any case
where—
(a)
the share is redeemable for the purposes of section 91D of FA 1996 as
a result of any arrangements mentioned in subsection (2)(b) of that
15
section (as substituted by sub-paragraph (2)), and
(b)
the arrangements were entered into after the company acquired the
share.
      (7)
But in that case, in relation to an accounting period beginning before 12th
May 2006, amounts are to be brought into account for the purposes of
20
Chapter 2 of Part 4 of FA 1996 as a result of those amendments only if the
amounts relate to any time on or after that date.
      (8)
In any other case, the amendments made by sub-paragraphs (2) and (3) have
effect in relation to shares held by a company on or after 22nd March 2006.
      (9)
But, in relation to an accounting period beginning before 22nd March 2006,
25
amounts are to be brought into account for the purposes of Chapter 2 of Part
4 of FA 1996 as a result of those amendments only if the amounts relate to
any time on or after that date.
     (10)
The amendments made by sub-paragraphs (4) and (5) have effect in relation
to any case where the public issue (within the meaning of section 91D(7) and
30
(8) of FA 1996) is on or after 22nd March 2006.
Creditor relationships and benefit derived by connected persons
10    (1)
After section 93B of FA 1996 insert—
“93C
Creditor relationships and benefit derived by connected persons
(1)
This section applies in the case of any loan relationship which is a
35
creditor relationship of a company (“company C”) if—
(a)
the return to company C from the relationship is less than a
return (a “commercial return”) on an investment of money at
a commercial rate of interest,
(b)
another company (“company P”) that is connected with
40
company C directly or indirectly derives any benefit as a
result of any arrangements made in consequence of, or
otherwise in connection with, the relationship, and
(c)
that benefit is designed to represent some or all of the amount
by which the return to company C from the relationship is
45
less than a commercial return.

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(2)
The credits to be brought into account by company C in respect of the
relationship for the purposes of this Chapter must be determined on
the basis of fair value accounting.
(3)
The fair value of company C’s rights under the relationship must
include the fair value of the benefit which is derived by company P
5
as a result of the arrangements.
(4)
Section 839 of the Taxes Act 1988 (connected persons) applies for the
purposes of this section.
(5)
In this section—
“arrangements” includes any agreement or understanding
10
(whether or not legally enforceable);
“benefit” includes value in any form.
(6)
In determining for the purposes of subsection (1)(a) the return to
company C from the relationship, any benefit which company C
derives directly or indirectly from the benefit derived by company P
15
as mentioned in subsection (1)(b) is to be disregarded.”.
      (2)
The amendment made by this paragraph has effect in relation to loan
relationships to which a company is a party on or after 22nd March 2006.
      (3)
But amounts are to be brought into account for the purposes of Chapter 2 of
Part 4 of FA 1996 as a result of that amendment only if the amounts relate to
20
any time on or after that date.
Loan relationships: money debts etc not arising from the lending of money
11    (1)
Section 100 of FA 1996 (money debts etc not arising from the lending of
money) is amended as follows.
      (2)
In subsection (1A) (conditions mentioned in subsection (1)(c)(iv)) for
25
paragraph (e) (property not an asset representing a loan relationship or
derivative contract) substitute—
“(e)
if the money debt is some or all of the consideration payable
for a disposal of property, the property in question is not an
asset representing a loan relationship or a derivative contract
30
the disposal of which is a relevant disposal.”.
      (3)
After that subsection insert—
“(1B)
For the purposes of subsection (1A)(e) above “relevant disposal”
means—
(a)
a disposal to which paragraph 12 of Schedule 9 applies or
35
would apply but for sub-paragraph (2A) of that paragraph,
(b)
a disposal to which paragraph 28 of Schedule 26 to the
Finance Act 2002 applies or would apply but for paragraph
30 of that Schedule,
(c)
a disposal not falling within paragraph (a) or (b) above as
40
respects which the whole of the consideration is brought into
account for the purposes of this Chapter or Schedule 26 to the
Finance Act 2002.”.
      (4)
The amendments made by this paragraph have effect in relation to disposals
made on or after 22nd March 2006.
45

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Schedule 6 — Avoidance involving financial arrangements
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Loan relationships: meaning of “fair value” in Chapter 2 of Part 4 of FA 1996
12    (1)
Section 103 of FA 1996 (interpretation of Chapter 2 of Part 4 of FA 1996) is
amended as follows.
      (2)
In subsection (1), in the definition of “fair value”, in paragraphs (a) and (b),
omit “in respect of amounts which at that time are not yet due and payable”.
5
      (3)
The amendment made by this paragraph has effect in relation to periods of
account ending on or after 22nd March 2006.
      (4)
But, in relation to a period of account beginning before 22nd March 2006, the
amendment made by this paragraph has effect only in relation to—
(a)
disposals or acquisitions (in whole or in part) of rights or liabilities
10
under a loan relationship, or
(b)
anything treated for the purposes of Chapter 2 of Part 4 of FA 1996
as such a disposal or acquisition,

which were made (or treated as made) on or after that date.
Loan relationships: continuity of treatment of groups etc
15
13    (1)
In Schedule 9 to FA 1996 (loan relationships: special computational
provisions) paragraph 12 (continuity of treatment: groups etc) is amended as
follows.
      (2)
In sub-paragraph (2A) (paragraph 12 not to apply where transferor uses fair
value accounting)—
20
(a)
in the opening words, for “uses” substitute “is regarded for the
purposes of this sub-paragraph as using”, and
(b)
for paragraph (aa) (treatment of transferee in respect of the
transaction) substitute—
“(aa)
for any accounting period in which it is a party to
25
the relationship, the transferee company shall be
treated for the purpose of determining the credits
and debits to be brought into account for the
purposes of this Chapter in respect of the
relationship as if it had acquired the asset or
30
liability representing the relationship for a
consideration equal to the amount mentioned in
paragraph (a) above (but on the assumption that
sub-paragraph (2C)(b) below is omitted).”.
      (3)
After that sub-paragraph insert—
35
   “(2B)
The transferor company shall be regarded for the purposes of sub-
paragraph (2A) above as using fair value accounting as respects
the loan relationship only if—
(a)
it uses fair value accounting as respects the relationship
and the debits and credits to be brought into account for
40
the purposes of this Chapter as respects the relationship
are also determined on that basis, or
(b)
it does not use fair value accounting as respects the
relationship but the debits and credits to be brought into
account for the purposes of this Chapter as respects the
45
relationship are determined on that basis.”.

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      (4)
After sub-paragraph (2B) (as inserted by sub-paragraph (3) above) insert—
   “(2C)
In any case where a discount (within the meaning given by section
100(3A)) arises in respect of the transaction, the series of
transactions or the transfer—
(a)
the consideration for the purposes of sub-paragraph (2)(a)
5
above is to be increased by the amount of the discount;
(b)
the amount to be brought into account by virtue of sub-
paragraph (2A)(a)(i) above is to be increased by the
amount of the discount.”.
      (5)
The amendments made by this paragraph have effect in any case where the
10
relevant transaction is on or after 22nd March 2006.
      (6)
For this purpose “the relevant transaction” means—
(a)
the related transaction mentioned in paragraph 12(1)(a) of Schedule
9 to FA 1996,
(b)
the first of the series of transactions mentioned in paragraph 12(1)(b)
15
of that Schedule, or
(c)
the transfer mentioned in paragraph 12(1)(c) or (d) of that Schedule,

as a result of which paragraph 12 of that Schedule applies or, but for sub-
paragraph (2A) of that paragraph, would apply.
Derivative contracts: computation in accordance with generally accepted accounting practice
20
14    (1)
Paragraph 17A of Schedule 26 to FA 2002 (computation in accordance with
generally accepted accounting practice) is amended as follows.
      (2)
In sub-paragraph (1) (amounts to be brought into account are those
recognised in determining company’s profit or loss) after “Subject to the
provisions of this Schedule” insert “(including, in particular, paragraph
25
15(1))”.
Derivative contracts: transactions within groups
15    (1)
In Schedule 26 to FA 2002 (derivative contracts), paragraph 28 (transactions
within groups) is amended as follows.
      (2)
After sub-paragraph (3) (rule for determining the credits and debits to be
30
brought into account) insert—
  “(3ZA)
In any case where a discount (within the meaning given by section
100(3A) of the Finance Act 1996) arises in respect of the transaction
or the series of transactions, the consideration for the purposes of
sub-paragraph (3)(a) is to be increased by the amount of the
35
discount.”.
      (3)
The amendment made by this paragraph has effect in any case where the
relevant transaction is on or after 22nd March 2006.
      (4)
For this purpose “the relevant transaction” means—
(a)
the related transaction mentioned in paragraph 28(2)(a) of Schedule
40
26 to FA 2002,
(b)
the first of the series of transactions mentioned in paragraph 28(2)(b)
of that Schedule, or
(c)
the transfer mentioned in paragraph 28(2)(c) or (d) of that Schedule,

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as a result of which paragraph 28 of that Schedule applies or, but for
paragraph 30 of that Schedule, would apply.
Derivative contracts: transactions within groups (fair value accounting)
16    (1)
In Schedule 26 to FA 2002 (derivative contracts), paragraph 30 (transactions
within groups: fair value accounting) is amended as follows.
5
      (2)
In sub-paragraph (1) (paragraph 28 not to apply where transferor uses fair
value accounting) for paragraph (b) (treatment of transferee in respect of the
transaction) substitute—
“(b)
for any accounting period in which it is a party to the
contract, the transferee company shall be treated for the
10
purpose of determining the credits and debits to be
brought into account for the purposes of this Schedule in
respect of the contract as if it had acquired the contract for
a consideration equal to the amount mentioned in
paragraph (a) (but on the assumption that sub-paragraph
15
(1A) is omitted).”.
      (3)
After that sub-paragraph insert—
   “(1A)
In any case where a discount (within the meaning given by section
100(3A) of the Finance Act 1996) arises in respect of the transaction
or the series of transactions, the amount to be brought into account
20
by virtue of sub-paragraph (1)(a) is to be increased by the amount
of the discount.”.
      (4)
The amendments made by this paragraph have effect in any case where the
relevant transaction is on or after 22nd March 2006.
      (5)
For this purpose “the relevant transaction” has the meaning given by
25
paragraph 15.
Derivative contracts: meaning of “fair value” in Schedule 26 to FA 2002
17    (1)
Paragraph 54 of Schedule 26 to FA 2002 (interpretation of Schedule) is
amended as follows.
      (2)
In sub-paragraph (1), in the definition of “fair value”, in paragraphs (a) and
30
(b), omit “in respect of amounts which at that time are not yet due and
payable”.
      (3)
The amendment made by this paragraph has effect in relation to periods of
account ending on or after 22nd March 2006.
      (4)
But, in relation to a period of account beginning before 22nd March 2006, the
35
amendment made by this paragraph has effect only in relation to—
(a)
disposals or acquisitions (in whole or in part) of rights or liabilities
under a derivative contract, or
(b)
anything treated for the purposes of Schedule 26 to FA 2002 as such
a disposal or acquisition,
40

which were made (or treated as made) on or after that date.